IER. The explicit modelling. for renewable electricity in TIMES

Transcription

1 Univerität Stuttgart IER Intitut für Energiewirtchaft und Rationelle Energieanwendung Report on Work Package B-1 of the ETSAP Project Integrating policy intrument into the TIMES Model The explicit modelling of upport ytem for renewable electricity in TIMES. Birgit Götz Marku Blel Ulrich Fahl Alfred Voß September 2012

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3 Table of Content Table of Content 1. Introduction Bai for the cae tudy: The German feed-in tariff ytem Modelling of feed-in tariff in TIMES The payment ide (1): The tariff The payment ide (2): Special proviion in the German FIT ytem The demand ide: The FIT urcharge Modelling of quantity-baed upport cheme in TIMES Concluion Literature Annex...29

4 Lit of Table and Lit of Figure Lit of Table Table 2-1: Tariff of the German FIT ytem for Table 3-1: Flexible degreion rate for olar photovoltaic according to the German FIT law from Lit of Figure Figure 2-1: FIT electricity generation, fee payment and average tariff in Germany in Figure 3-1: Development of the feed-in tariff in real term for one pecific intallation... a a function of the inflation rate...8 Figure 3-2: Modelling approach to integrate feed-in tariff in TIMES in the cae of an electricity-only plant...11 Figure 3-3: Modelling approach to integrate feed-in tariff in TIMES in the cae of a... CHP plant with fixed power to heat ratio...12 Figure 3-4: Modelling approach to integrate feed-in tariff in TIMES in the cae of a... CHP plant with flexible power to heat ratio...12 Figure 3-5: Modelling approach for modernized hydropower plant in TIMES...13 Figure 3-6: Modelling approach for the repowering of exiting onhore wind farm in TIMES...15 Figure 3-7: Illutration of the merit-order effect of renewable electricity generation...19 Figure 3-8: Modelling approach to integrate the FIT urcharge in TIMES...20

5 1. Introduction 1 1. Introduction Enhancing the ue of renewable energy ource i conidered a one of the major trategie in the combat againt climate change. For the European Union, an ambitiou goal of raiing the hare of renewable energie in gro final energy conumption to at leat 20 % until 2020 ha been etablihed (cf. EC 2009). In thi contex the electricity ector play an eential role. According to the National Renewable Energy Action Plan, the contribution of renewable to total electricity generation hould increae to 37 % by 2020 (cf. EC 2011). In order to reach thi goal, by now ome type of upport ytem for renewable electricity ha been implemented in every EU member tate. A ha already been highlighted in the Report on Work Package A of thi projec a baic differentiation can be made between price-baed (epecially fixed feed-in tariff (FIT)) and quantity-baed meaure (mot importantly tradable green certificate cheme (TGC) and tendering procedure). In the European Union, a clear domination of feed-in tariff or premium i obervable with 23 member countrie uing uch a ytem. In Sweden, Poland and Romania quota obligation contitute the only promotion cheme for renewable electricity, while in the United Kingdom, Italy and Belgium both FIT and TGC ytem are applied imultaneouly (cf. de Jager et al. 2011, p. 28). Support ytem for renewable electricity have a ignificant impact on the long-term development of the energy ytem and hould therefore be taken into account when conducting energy ytem analye. The purpoe of thi report i to how how uch ytem can be explicitly integrated into the energy ytem model TIMES, uch that their effect can be evaluated endogenouly. Here, a focu i put on developing a methodology for the incorporation of feed-in tariff, a thee cheme are much more complex to model in an explicit manner than renewable quota. In order to arrive at a modelling approach with high practical relevance, the German FIT ytem, which will be outlined in Chapter 2, i ued a a bai. Chapter 3 then look at the different tep of modelling FIT cheme, including the repreentation of the payment ide, where both the baic approach to depict feed-in tariff and pecial proviion of the German ytem are conidered, and of the demand ide, i.e. mot importantly, the effect on end-ue electricity price and demand. In the following chapte baic iue in the modelling of different type of quantity-baed promotion ytem for renewable electricity are highlighted. On the bai of thi methodological approach, variou apect regarding the promotion of renewable electricity can be examined. Firt of all, the mot common upport ytem can be compared with repect to their impact on the expanion of the different renewable energy ource in electricity production, on electricity price, energy ytem cot etc. Apart from tha it can be analyed how changing cenario aumption, for example on foil energy price or the role of nuclear energy, affect the development of renewable electricity under the different upport ytem. In addition, the flexible and explicit modelling approach provide the poibility to evaluate the interaction between different policy intrument, e.g. promotional meaure for renewable electricity and emiion trading ytem.

6 2 2. Bai for the cae tudy: The German feed-in tariff ytem 2. Bai for the cae tudy: The German feed-in tariff ytem In Germany, a feed-in tariff cheme for renewable electricity, the Renewable Energy Source Act (Erneuerbare-Energien-Geetz, EEG), wa introduced in the year 2000 with the aim to hift electricity generation on to a more utainable pathway, to reduce the demand for foil fuel a well a to foter renewable technologie. Baically, thi ytem comprie three tructural element: (1) grid operator are obliged to connect any renewable generation unit to the grid and, if neceary, to trengthen and expand the exiting grid ytem; (2) renewable electricity i to be granted priority purchae, tranmiion and ditribution and (3) grid operator pay previouly fixed tariff to the renewable electricity producer. Thee tariff are et by the policymaker with regard to the development tage and the cot ituation of the different renewable generation technologie. Thu, tariff vary according to the ource of renewable energy (hydro, wind, ola bioma and geothermal energy), the capacity of the intallation and, in the cae of wind, the location of the project (cf. Table 2-1). For each intallation, they are paid over a period of twenty year. In order to incentivie contant effort to increae cot effectivene, tariff for newly intalled plant are ubject to an annual degreion at a certain percentage. Major amendment to the FIT law have been conducted in 2004, 2009 and 2012 and were baed on a cientific monitoring proce. Their main objective conited in adjuting the tariff to the current competitive ituation of the different renewable generation technologie and in avoiding ituation of exce ubidiation. Mot importantly, ubtantial cut were executed in the cae of olar photovoltaic with tariff falling by more than half between 2009 and April of With the lat amendment at the beginning of 2012, effort were alo undertaken to increae the market orientation of the ytem. With the conventional ytem baed on fixed tariff remaining in place, renewable electricity producer can now chooe alternatively a market premium, which they receive when elling the generated electricity directly to the market. Thi market premium i calculated a the difference between the fixed FIT for the repective intallation and the average monthly wholeale electricity market price plu a o-called management fee which differ acro the variou form of renewable energy. Even though thi alternative cheme a enjoyed great demand in the firt half of 2012, mainly for onhore wind farm, it future i uncertain, a more and more criticim i being voiced regarding the extra cot that epecially the high management fee have caued (cf. Rotankowki et al. 2012). The additional cot that tranmiion ytem operator incur due to the difference between FIT tariff and wholeale electricity price can be paed on to final electricity conumer. A pecial equalization cheme i laid down in the FIT law levelling the electricity generation and the cot under the FIT ytem between the four tranmiion grid operator in Germany. On thi bai, the FIT urcharge, i.e. the additional levy on end-ue electricity price, i then calculated a (cf. Bode and Grocurth 2006): FIT urcharge = (Ø-FIT tariff Ø-wholeale electricity price) * FIT quota

7 2. Bai for the cae tudy: The German feed-in tariff ytem 3 Table 2-1: Tariff of the German FIT ytem for 2012 (cf. Bundegeetzblatt 2011) Tariff (ct/kwh) Bonu (ct/kwh) Annual degreion rate Hydropower (including moderniation ( 5 MW) and extenion of exiting power plant) 500 kw MW MW MW MW MW 4.2 > 50 MW 3.4 1% Landfill, ewage and mine ga 500 kw el MW el MW el > 5 MW el 3.98 (only mine ga) Ga proceing bonu (upgrade to natural ga quality; 500 kw el ): 1-3 ct/kwh depending on rated output 1.5% Bioma a Subtance tariff cla I b Subtance tariff cla II b 150 kw el kw el kw el 5 c 8 / 6 d 11 5 MW el 4 c 20 MW el Ga proceing bonu (ee above) 2% (only on baic tariff and ga proceing bonu) Geothermal energy Independent of capacity 25 Bonu for uing petrothermal technology: 5 ct/kwh 5%, tarting in 2018 Wind power Onhore Initial tariff e 8.93 Baic tariff 4.87 Offhore Initial tariff h 15 Baic tariff 3.5 Sytem ervice bonu f (until 2015): 0.48 ct/kwh; Repowering bonu g : 0.5 ct/kwh - 1.5% 7%, tarting in 2018 Photovoltaic i Rooftop intallation 10 kw 19.5 Flexible degreion depending on 40 kw j 18.5 market volume, ranging between 1 MW j % (if intalled capacity in the - 10 MW 13.5 previou year < 1000 MW) and Free-tanding intallation 29% (if intalled capacity in the 10 MW 13.5 previou year > 7500 MW) a Special tariff are available for mall manure intallation ( 75 kw el ; 25 ct/kwh) and biow ate fermentation plant (16 ct/kwh if 500 kw el ; 14 ct/kwh if 20 Mw el ). b Additional remuneration for ubtance lited in the Bioma Ordinance (BiomaeV) (cf. BMU 2011a) c For plant w ith a capacity betw een 500 kw el and 5 MW el only 2.5 ct/kwh for electricity from bark or foret w ate w ood d For plant w ith a capacity betw een 500 kw el and 5 MW el only 6 ct/kwh for electricity from manure e The higher initial tariff i paid for the firt five year. Thi period i extended by tw o month for each 0.75% by w hich the intallation yield fall hort of 150% of a previouly defined reference yield. f Bonu for w ind pow er plant that fulfill the requirement of the Sytem Service Ordinance (cf. Bundegeetzblatt 2009) g Bonu for the replacement of exiting w ind pow er plant (intalled before 2002) on the ame or an adjacent ite h The higher initial tariff i paid for the firt 12 year. Thi period i extended by 0.5 month for each full nautical mile beyond 12 nautical mile that the intallation i located from the hore and by 1.7 month for each full metre of w ater depth over 20 metre. Alternatively, operator of plant intalled before 2018 can alo opt for the "acceleration model", receiving a higher initial tariff of 19 ct/kwh for 8 year (plu the ame extenion baed on the ditance to hore and w ater depth a in the normal model). i Here, the tariff according to the additional amendment on photovoltaic that have been decided in June 2012 and apply retroactively a of 1 April 2012 are reported (cf. BMU 2012a). j For rooftop intallation w ith a capacity betw een 10 kw and 1 MW a market integration model ha been introduced: for thee intallation, only 90% of the electricity generated can be remunerated through the FIT ytem, w hile the ret mut be ued for ow n conumption or old to the market.

8 4 2. Bai for the cae tudy: The German feed-in tariff ytem Thu, the FIT urcharge in one year i obtained a the difference between the average FIT tariff (Ø-FIT tariff, acro all renewable energy ource) and the average annual electricity price on the wholeale market (Ø-wholeale electricity price) multiplied by the FIT quota, i.e. the percentage hare of electricity remunerated through the FIT ytem in total final electricity conumption. Special proviion in form of a reduced FIT urcharge have been implemented for manufacturing enterprie and rail operator with comparatively high electricity conumption in order to prevent endangering their international or intermodal competitivene. According to the amended FIT law, the following requirement need to be fulfilled in the cae of manufacturing enterprie: (1) an electricity conumption of more than 1 GWh per annum, (2) a ratio of electricity cot to gro value added of more than 14 % and (3) a certified energy audit aeing energy conumption and the potential for energy aving ha been carried out. Thee companie then only pay the full FIT urcharge for the firt GWh of conumption, 10 % of the regular charge for the conumption between 1 and 10 GWh, 1 % between 10 and 100 GWh and 0.05 ct/kwh for the hare of electricity exceeding 100 GWh. Enterprie whoe electricity demand i above 100 GWh and whoe ratio of electricity cot to gro value added i more than 20 % only pay a FIT urcharge of 0.05 ct/kwh for their entire electricity conumption. The reduced urcharge of 0.05 ct/kwh alo applie in the cae of rail operator with an electricity demand of at leat 10 GWh for the amount of electricity exceeding 10 % of the annual conumption. Apart from the rail operator, thi regulation benefit mainly part of the chemical, the pape the iron and teel a well a the non-ferrou metal indutry in Germany. In total, 73 TWh of final electricity conumption have been excluded from the regular FIT urcharge in 2011 (cf. BMU 2011b). With the help of the feed-in tariff, the hare of renewable energie in the gro electricity conumption of Germany ha increaed from 6 % in 2000 to 20 % (122 TWh) in 2011 (cf. BMU 2012b). Within the FIT ytem, 91 TWh of renewable electricity have been remunerated in 2011 with fee payment amounting to 16.8 billion and average tariff ranging between 9.2 and 40.2 ct/kwh (cf. Figure 2-1). Given the wide pread in tariff, coniderable difference can be oberved with repect to the contribution of the variou renewable energy ource and the cot they entail for the ytem: while the hare of olar photovoltaic in the total generation from FIT intallation amounted to 21 % in 2011, almot half of the entire FIT payment went to olar photovoltaic. In contra onhore wind farm only accounted for a quarter of FIT payment while producing almot half of the electricity in the FIT ytem. The FIT urcharge ha rien ubtantially in recent year from 0.2 ct/kwh in 2000 to 2.05 ct/kwh in 2010 and 3.59 ct/kwh in For the future, ambitiou goal have been et regarding the expanion of renewable electricity generation in Germany. The aim i to increae the contribution of renewable energy to gro electricity conumption to 35 % in 2020, 50 % in 2030 and 80 % in 2050 (cf. BMU and BMWi 2011).

9 2. Bai for the cae tudy: The German feed-in tariff ytem 5 Figure 2-1: *incl. ga from landfill, mine and ewage treatment plant FIT electricity generation, fee payment and average tariff in Germany in 2011 (own illutration baed on ÜNB 2012)

10 6 3. Modelling of feed-in tariff in TIMES 3. Modelling of feed-in tariff in TIMES In the following chapte a methodological approach on how to repreent feed-in tariff ytem for renewable electricity in the energy ytem model TIMES will be decribed. In former energy ytem analye, the effect of feed-in tariff have often only been taken into account in an indirect way by exogenouly etting minimum volume for the electricity produced from the different type of renewable energie through uer contraint (cf. UBA (2009) and IER et al. (2010)). Thi, howeve clearly reduce the flexibility of the model, a generally no change in the electricity generation from renewable ource will occur when the cenario aumption are altered. Moreove the interaction with other type of policy intrument, a for example the European Emiion Trading Scheme (ETS), cannot be evaluated. Apart from tha the impact of the feed-in tariff on retail electricity price, a the additional cot of the tariff ytem are paed down to final conumer, i neglected when exogenouly fixing the minimum generation from renewable energy. Therefore, the aim of the methodology ued in thi report i to explicitly integrate the tariff ytem into TIMES. In thi way, the competitive poition of the variou type of renewable energy technologie can be evaluated within the model and the development of electricity generation baed on renewable energie i endogenouly determined. In addition, the impact of the feed-in tariff ytem on electricity price and electricity demand i taken into conideration by integrating the FIT urcharge into the model framework. Accordingly, the modelling approach i plit up into two part: firtly, it will be hown how the payment ide (i.e. the tariff) can be introduced into the model and econdly, the repreentation of the demand ide (i.e. the FIT urcharge) will be outlined The payment ide (1): The tariff It i often highlighted that FIT ytem cannot be characterized a ubidie in the trict ene, due to the fact that they do not involve any payment from government unit (cf. OECD 2007). From the point of view of the renewable plant operato howeve the tariff can be undertood a a ubidy, a they contitute a compenation for the renewable electricity generation above the market price. Hence, in the modelling approach the TIMES parameter which are already available to repreent ubidie are ued. In TIMES, ubidie are treated a payment from outide the ytem and therefore enter the objective function with a negative ign. In the cae of feed-in tariff, which can be interpreted a ubidie on the amount of electricity generated, the parameter FLO_SUB, decribing a ubidy on a proce flow, would be mot appropriate. At thi poin howeve attention need to be called to a number of pecial feature that the German FIT ytem exhibit and that have to be accounted for in the modelling approach: The tariff are paid over a limited period of time (uually 20 year). A the technical lifetime of ome renewable generation technologie exceed thi time pan, the limitation of the payment period ha to be explicitly pecified within the model framework.

11 3. Modelling of feed-in tariff in TIMES 7 According to the legal tipulation, the tariff remain contant in nominal term during the payment period reulting in a gradual decline in real term. In the model, real monetary value are applied uch that the reduction of tariff due to inflation ha to be conidered when fixing the tariff in the model. While the tariff level for a particular plant tay nominally contant throughout the payment period, each year tariff are reduced for newly intalled plant according to the degreion rate in the FIT law. Thu, tariff for new plant depend on their vintage year. Thee characteritic are not pecific to the German ytem, but are applied in mot FIT ytem throughout the European Union (cf. Ragwitz et al. 2012). The impact of the feed-in tariff on the competitivene of renewable generation technologie depend ubtantially on thee feature uch that taking them into conideration in the model i eential for a realitic repreentation of the FIT ytem. In order to integrate the annual degreion of tariff, the characteritic of the procee decribing the different renewable electricity technologie need to be defined a dependent on their vintage year. In the default etting of TIMES, all proce parameter are tied to the current model yea but by aigning the et PRC_VINT to a pecific proce all it parameter, including the tariff, can be vintaged. It ha to be mentioned, howeve that uing the vintaging option clearly increae the model ize. The repreentation of the other two important feature, the limitation of the payment period and the tariff reduction caued by inflation, can be accomplihed with the help of a SHAPE curve. Thi TIMES parameter etablihe uer-defined multiplication factor which are applied to age-dependent proce parameter. Hence, for a pecific renewable electricity plant built in a certain year the tariff would be paid in full height in the firt year after contruction (i.e. multiplication factor = 1). In the econd yea tariff (in real term) are reduced by the annual inflation rate (i.e. multiplication factor = 1/1.023 with an annual inflation rate of 2.3 %). Thereby, inflation can be accounted for in each year of the payment period. The aumption on the future inflation rate can have ignificant implication on the development of the feed-in tariff. Thi i highlighted in Figure 3-1 howing the SHAPE curve for different inflation rate. It become apparent that when auming an average inflation rate of 2.3 %, after 20 year in real term the tariff only amount to about 65 % of the initial value tipulated in the FIT law. Conequently, tariff do not only decreae on a year to year bai for newly intalled plant becaue of degreion, but tariff alo decline coniderably for one pecific plant due to inflation. Apart from tha the SHAPE curve i alo applied to include the limitation of the payment period into the model. If the lifetime of a plant exceed 20 year, the SHAPE parameter i et to zero from the 21 t year onward. Furthermore, haping of proce parameter alo make it poible to model other change in the tariff tructure of one pecific intallation. For onhore and offhore wind energy, a differentiation i made between a high initial tariff, which i paid

12 8 3. Modelling of feed-in tariff in TIMES over a pecific number of year, and a lower baic tariff for the ret of the payment period. In other cae, a certain bonu i only provided for a limited number of year. Thi drop in remuneration can be reflected in the SHAPE curve by uing the ratio of the baic tariff (or the tariff without bonu) to the initial tariff (or the tariff with bonu) a multiplication factor hape factor inflation: 2.3% p.a. inflation: 1.5% p.a. inflation: 3.0% p.a. Figure 3-1: payment year Development of the feed-in tariff in real term for one pecific intallation a a function of the inflation rate Ye introducing the TIMES parameter SHAPE alo complicate the modelling proce further. At the time that thi methodology wa developed, the SHAPE parameter could not be ued in combination with the parameter FLO_SUB. To aign a SHAPE curve to FLO_SUB, the parameter FLO_SUBX would be neceary which would have to be etablihed in the TIMES model code. Therefore, an alternative approach i created baed on the parameter NCAP_FSUB. Thi parameter pecifie a ubidy on the intalled capacity of a proce and can be ued in combination with NCAP_FSUBX, whoe parameter value i a dicrete number indicating which SHAPE curve hould be applied to the tariff defined in NCAP_FSUB. Thi require converting the aement bai of the feed-in tariff from the amount of electricity generated (ct/kwh) to the intalled capacity (ct/kw) baed on the availability factor laid down in the input data. Moreove to avoid additional capacity being intalled (to receive the ubidie) without it being ued for electricity production, the availability i laid down a fixed (intead of uing an upper bound). At the ame time, uing fixed availability factor eem to reproduce the ituation in reality quite well, a with the fixed tariff the electricity upply from renewable i uually not oriented on the market ituation but on the availability of renewable ource. So on the whole, with the help of the parameter NCAP_FSUB in combination with PRC_VINT and SHAPE a modelling technique can be developed to integrate feed-in tariff explicitly into the framework of the energy ytem model TIMES. A general example of the implementation in the TIMES modelling language i given in the Annex. To illutrate how

13 3. Modelling of feed-in tariff in TIMES 9 the tariff affect energy ytem cot, a imple repreentation of the objective function, including the ubidie on the intalled capacity of renewable technologie, i given in the following 1 : Min! T t1 p t p p fit p ct_ fom p dt cap_ pati ub_fom p dt NCAPp prc _ tr, p, p ct_ act vvintr, t, p p ct_ inv ( c) imp c prc _ tr, ( c) exp c prc _ tr, d ACT v, p pout c pinr, c prc _ tr, t price price NCAP c, c, ct_ flo r. v, p ct_ inv d IMP t d EXP t c, p vv int r, t, p c, c, d FLO t p NCAP NCAP c, v, p NCAP p p Variable operation cot Fixed operation cot Subidie on capacity Invetment cot Import cot Export revenue Flow cot (1) With: c commodity index, exp c index for export procee p of commodity c to region fit p index for procee p in the feed-in tariff ytem, imp c index for import procee p of commodity c from region in c index for proce p with commodity c a inpu out c index for proce p with commodity c a outpu p proce index, r region index, t index for the current time period from 1,..,T, time-lice index, v index for the vintage yea vint p index for vintage period of procee p that have been intalled in a previou period v but till exit in time period ACT activity variable, cap_pati p pat capacity, ct_act p pecific variable operation co ct_flo c, pecific flow co ct_fom p pecific fixed operation and maintenance co ct_inv p pecific invetment co ct_inv v,p pecific invetment co d t duration of time period EXP c, export variable (for export proce p of commodity c to region r in time period t and time lice ), 1 The decription of variable ued for the objective function can be found in the Lit of Variable at the beginning of thi report.

14 10 3. Modelling of feed-in tariff in TIMES FLO c, flow variable, IMP c, import variable (for import proce p of commodity c from region r in time period t and time lice ), NCAP p new invetment variable (of proce p in time period t), NCAP v,p new invetment variable (of proce p in vintage period v), prc_t time lice of proce price c, pecific import and export cot (for proce p and commodity c from/to region r in time period t and time lice ), ub_fom p pecific ubidy on intalled capacity and dicount rate in time period t to the bae year. β t Hence, energy ytem cot are reduced when adding the ubidie for renewable electricity. Further inight on how the modelling approach function can be gained by looking at a implified verion of the dual equation of the activity variable of a renewable electricity generation proce (auming that the activity i defined a the electricity output) (cf. Remme 2006, pp. 136f): ACT v, : act_cot_ d v, FW, UP, 1 flohrup combal v, FW, FUEL, actup capact v, combal ELC, With: act_cot_d dicounted variable operation cot (without fuel cot), actup dual variable of an upper bound on the activity variable (economic rent), capact v, dual variable of the capacity-activity contrain combal ELC, dual variable of the commodity balance of the output electricity (ELC), combal FUEL, dual variable of the commodity balance of the fuel input (FUEL), flohrup v,fw, for CHP plant: dual variable of the contraint on the maximum hare of heat generation in total electricity and heat generation, η activity-baed efficiency of converting the input flow (FUEL) into the output flow (ELC) and ζ v,fw,up, for CHP plant: maximum hare of heat generation in total electricity and heat generation. The dual equation of the activity of an electricity generation proce contain all cot component which need to be covered by the electricity price. The electricity price (right-hand ide of equation (2)) i calculated a the dual variable (i.e. the hadow price) of the commodity balance of electricity output. Thu, when the left-hand ide of equation (2) i larger than the electricity price, the technology i not competitive and the activity of the proce will be zero. For an activity level above zero, the left-hand and right-hand ide of equation (2) need to be equal, meaning that the electricity price cover all cot component of the activity of the proce. For example, if generation cot (repreented by the firt three term in equation (2)) of a renewable technology are lower than the electricity price, thi technology will be applied up to it full potential for the repective model period. In thi example, the potential i limited by (2)

15 3. Modelling of feed-in tariff in TIMES 11 an upper bound on the activity of the proce. Hence, the hadow price of thi contraint (negative value) repreent the economic rent aociated with electricity generation with thi technology. When modelling the FIT ytem with NCAP_FSUB, the fixed operation and maintenance cot of the repective intallation are lowered, rendering them more competitive when compared to conventional generation technologie. In equation (2) thi i reflected in a decreae in the capacity related cot which are included in the variable capact v,, repreenting the dual variable of the capacity-activity contrain i.e. in the cae of a power plant the part of the electricity price that i needed to cover fixed operation and invetment cot (cf. Remme et al. 2009). Conequently, it i decided endogenouly through the optimization mechanim which procee for electricity production will be inveted in. Howeve the modelling approach with NCAP_FSUB alo ha it limitation. The converion of tariff from FLO_SUB to NCAP_FSUB i baed on the condition that there i a fixed ratio between electricity generated and intalled capacity. Thi i the cae for electricity-only plant and combined heat and power (CHP) plant for which the ratio between heat and power generation i fixed. The converion i not poible, though, for CHP intallation with a flexible power to heat ratio. Conequently, for thi type of CHP technology it i unavoidable to put the ubidy directly on electricity generation with the help of FLO_SUB. Ye thi make it impoible to integrate the annual degreion of tariff, the tariff reduction due to inflation and the limitation of the payment period with the help of the parameter PRC_VINT and SHAPE. In order to till guarantee a realitic repreentation of the FIT ytem, it i therefore neceary to introduce for each renewable CHP technology with flexible power to heat ratio one proce for each model period that can only be intalled in the repective model period. Thi proce then receive the average tariff (in real term) for each model period for the following 20 year, taking into account the annual degreion and inflation rate. It i apparent that thi technique entail the implementation of a large number of additional procee, uch that it application i limited to CHP plant with a flexible heat to power ratio. A an overview, the modelling approache for different type of electricity generation technologie are outlined in Figure 3-4. Renewable Energy (RE) Electricity FLO RE Electricity-only plant FLO ELEC electricity generated (ct/kwh) Converion of tariff availability(fx) + uing PRC_VINT and SHAPE intalled capacity (ct/kw) Figure 3-2: Modelling approach to integrate feed-in tariff in TIMES in the cae of an electricityonly plant

16 12 3. Modelling of feed-in tariff in TIMES Renewable Energy (RE) FLO RE CHP plant fixed power to heat ratio FLO HEAT FLO ELEC Heat Electricity Converion of tariff availability(fx) intalled electricity electricity generated (ct/kwh) generation capacity (ct/kw el ) + uing PRC_VINT and SHAPE Figure 3-3: Modelling approach to integrate feed-in tariff in TIMES in the cae of a CHP plant with fixed power to heat ratio Renewable Energy (RE) Heat FLO Electricity HEAT FLO RE CHP plant flexible power to heat ratio FLO ELEC intallation No tariff: bae period, fixed generation from renewable FLO RE CHP plant intallation FLO HEAT FLO ELEC Tariff: ø (ct/kwh), taking into account degreion and inflation rate, for four model period FLO RE CHP plant intallation FLO HEAT FLO ELEC Figure 3-4: Tariff: ø (ct/kwh), taking into account degreion and inflation rate, for four model period Additional procee for the following model period Modelling approach to integrate feed-in tariff in TIMES in the cae of a CHP plant with flexible power to heat ratio 3.2. The payment ide (2): Special proviion in the German FIT ytem Apart from the regular tariff for new intallation, FIT ytem uually contain a number of pecial proviion that need to be taken into account in the modelling approach. In the cae of the German FIT law, thi concern the modernization of exiting hydropower plant, the repowering of onhore wind farm and the flexible degreion cheme for olar photovoltaic. Moreove when trying to evaluate the impact of feed-in tariff on the energy ytem, other factor that might influence the expanion of renewable electricity generation hould be taken into conideration. In the analyi at hand, the focu i laid on tax incentive for olar PV rooftop intallation.

17 3. Modelling of feed-in tariff in TIMES 13 Modernization of hydropower plant Hydropower ha been utilized for electricity production in Germany for everal decade and the potential ha already been exploited almot entirely. Furthermore, tringent ecological requirement have to be met when intalling new hydropower plant (Kaltchmitt et al. 2006). Therefore, more attention i put on the modernization and reactivation of exiting power plant and ince 2004, the German FIT cheme contain pecial tariff for modernized hydropower intallation. According to the amended FIT law from 2012, exiting hydropower plant are entitled to tariff payment (at the ame level a new intallation) if the intalled or potential capacity i raied or if technical facilitie to reduce output by remote mean are implemented. In the cae of an intalled capacity of up to 5 MW, total electricity generation i remunerated, while for intallation with more than 5 MW tariff are only paid for the hare of electricity that can be attributed to the increae in capacity. The cot of modernization are et at 1000 /kw (cf. Kaltchmitt et al. 2006; Staiß et al. 2007) and it i aumed that the modernization entail an increment in intalled capacity of 5 % (cf. BMU 2011c). When integrating thi pecial tariff rule into the model, it ha to be kept in mind that operator of exiting hydropower plant have two option: either to keep operating in the ame manner - thereby avoiding additional cot but alo forfeiting tariff payment - or to carry out modernization activitie and enter the FIT ytem. In TIMES, the modernization option i introduced with the help of an additional proce ubequent to the original proce repreenting the exiting hydropower plant (cf. Figure 3-5). Hydropower Figure 3-5: FLO HYDRO Option 2 Modernization, entitled to FIT Exiting hydropower plant Additional parameter: FLO_FUNC(HydropoweDummy): 1 Dummy Parameter: FLO_FUNC: 1.05 x exiting one NCAP_AF: exiting one NCAP_COST: cot of modernization NCAP_TLIFE: exiting one NCAP_FSUB Modernized hydropower plant FLO ELEC Option 1 No modernization, notentitled to FIT Modelling approach for modernized hydropower plant in TIMES Electricity FLO ELEC Thi proce contain the cot of modernization a well a the feed-in tariff (uing NCAP_FSUB). A the modernization proce i bound to the exiting power plant through it outpu the increae in intalled capacity i modelled with the help of the parameter FLO_FUNC, uually ued to pecify the efficiency of a proce. In general, for hydropower plant FLO_FUNC (decribing the relation between hydropower input and electricity output) i fixed to 1. When etting FLO_FUNC to 1.05 in the cae of the modernization proce and

18 14 3. Modelling of feed-in tariff in TIMES defining the activity through the proce outpu the capacity (and activity) of the proce i automatically raied by 5 %. The availability factor (parameter NCAP_AF) and the technical lifetime (parameter NCAP_TLIFE) for the modernization proce are taken from the exiting hydropower plant. Repowering of onhore wind farm Beide the regulation for the modernization of hydropower plant, the German FIT law contain another pecial proviion related to exiting intallation of a renewable generation technology: the repowering bonu for onhore wind power plant. Hence, a imilar procedure i choen to incorporate thi tariff option into the model. Repowering decribe the replacement of older and maller wind turbine with new and more powerful one. Epecially in area with favorable wind condition near the coat the potential for electricity generation from onhore wind ha already been exhauted to a great exten uch that the repowering option will play a crucial role in further increaing the wind power capacity in Germany. Apart from tha the impact on the landcape i reduced, a a maller number of wind turbine i needed for the ame amount of electricity generation, and improvement in term of grid integration are expected (cf. BMU 2007). Therefore, in the German FIT law from 2012 a bonu of 0.5 ct/kwh in addition to the higher initial tariff for onhore wind power i provided for repowering intallation if they atify the following condition: (1) the replaced turbine were commiioned before 2002 and (2) the intalled capacity of the repowering plant i at leat twice the capacity of the replaced one. In the model, the relatively conervative aumption i choen that repowering lead to a doubling of intalled capacity (in accordance with BMU (2007) and Rehfeldt and Gerde (2005)). With repect to the invetment cot of repowering plant, it ha to be taken into account that thee plant can make ue of the already exiting infratructure of the replaced intallation. Thu, it i aumed that in the cae of repowering, the infratructure related cot (ite developmen foundation, grid connection, etc.) only amount to 20 % of the invetment cot of the actual wind turbine, a compared to 30 % for wind power plant in previouly undeveloped location (cf. Rehfeldt and Gerde 2005). A it wa the cae for the modernization of hydropower plant, the modelling procedure for the repreentation of repowering i baed on the different coure of action the operator of the exiting onhore wind power plant can chooe. Hi firt option would be to operate the exiting plant until the end of it lifetime without replacing it. Alternatively, he could replace it before the end of it lifetime with a more powerful, new turbine. Here, the reidual value of the exiting intallation plu the expected revenue (minu operating cot) for the remaining lifetime need to be taken into conideration. If the plant wa intalled after 1999, thi include FIT payment. A third option conit in a replacement at the end of the lifetime of the exiting turbine. It ha to be noted that while the modernization of hydropower plant contituted an alteration to an exiting plant which keep operating, repowering implie the definite re-

19 3. Modelling of feed-in tariff in TIMES 15 placement of an exiting intallation. Thi render the modelling approach more complex. The different tep that are neceary to integrate repowering of onhore wind power plant into the model are illutrated in Figure 3-6. Option 3 Tranfer of capacity at the end of lifetime of exiting plant Parameter: FLO_FUNC: 1 NCAP_AF: exiting one NCAP_FOM: exiting one NCAP_ICOM: 1, for Dummy 2 NCAP_PKCNT: exiting one NCAP_TLIFE: 20 FLO WIND Figure 3-6: Exiting wind power plant Additional parameter: NCAP_OCOM: 1, for Dummy 2 FLO_FUNC(Wind,Dummy 1): 1 FLO_FUNC(Wind,Dummy 2): 1 Dummy for capacity Option 2 Replacement during lifetime of exiting plant Option 1 Generation from exiting plant Repowering plant FLO ELEC FLO ELEC Parameter: FLO_FUNC: 2 NCAP_AF: exiting one NCAP_COST: of repowering plant NCAP_FOM: ½ of exiting one NCAP_PKCNT: exiting one NCAP_TLIFE: 20 NCAP_FSUB Modelling approach for the repowering of exiting onhore wind farm in TIMES Firt of all, a proce repreenting the repowering plant need to be added compriing the invetment and operating cot a well a the feed-in tariff (including the repowering bonu). Thi proce i coupled with the exiting wind power plant through a dummy commodity ( Dummy 1 ). The doubling of intalled capacity i again defined via the parameter FLO_FUNC. Other pecification, like the availability factor and the amount of capacity contributing to the peak (parameter NCAP_PKCNT), are adopted from the exiting plant and the lifetime i fixed to 20 year (a i the cae with all wind turbine in the model). Hence, with thi configuration the replacement of the exiting turbine during it lifetime can be modelled. It ha to be pointed out that in the model the proce for the exiting plant will till be ued giving rie to fixed operating and maintenance cot uch that on the repowering proce (which ha double capacity) only half of the pecific operating cot i put to keep the total amount correct. Howeve with only Dummy 1 a input the repowering plant would no longer function once the exiting plant reache the end of it lifetime. Therefore, an additional proce ( Dummy for capacity ) i introduced which provide the input commodity ( Dummy 3 ) for the repowering plant after the exiting one ha been put out of operation. Thi proce ha wind power a an input o it can operate independently of the exiting plant. Mot importantly, the capacity of thi proce i bound to the decommiioned capacity of the exiting wind turbine. Thi i achieved with the help of the parameter NCAP_OCOM and NCAP_ICOM. By aigning NCAP_OCOM to the exiting wind turbine proce, it pecifie

20 16 3. Modelling of feed-in tariff in TIMES the amount of a commodity (here Dummy 2 ) which i releaed during the decommiioning of the proce. Thi commodity i then required to intall capacity of the proce Dummy for capacity to which NCAP_ICOM i allocated. In thi way, the capacity of the dummy proce (and alo of the repowering plant) i limited by the capacity of the exiting plant that go out of operation. Thu, alo the third option - replacement at the end of lifetime can be accounted for in the modelling approach. Flexible degreion for olar photovoltaic Photovoltaic ytem have experienced a period of very dynamic growth in recent year in Germany with an increae in intalled capacity from 76 MW p in 2000 to 24.8 GW p in 2011 (cf. BMU 2012b). Thi wa fuelled by relatively high feed-in tariff and a ignificant drop in invetment cot for PV module (cf. BSW-Solar 2012). Conequently, in addition to a number of ubtantial tariff cut, the German government ha introduced in 2010 a flexible degreion cheme for olar photovoltaic where the annual decline in tariff depend on the actual market growth. In the current verion of the FIT law (including the additional amendment from June 2012), an extenion of the olar PV capacity between 2500 and 3500 MW p per annum ha been etablihed a the target value which i aociated with a monthly degreion rate of 1 % (reulting in 11.4 % p.a.). If the actual annual invetment fall below or exceed thi extenion corridor, the degreion rate i adjuted accordingly reulting in potential rate between -6.2 % and 28.9 % per year (cf. Table 3-1). Furthermore, it ha been decided that the total amount of olar PV capacity that will be remunerated through the FIT ytem i limited to 52 GW p. Thi flexible tariff cheme can be taken into account in the model by implementing one proce for each of the degreion tep. Thee procee all repreent the ame type of photovoltaic ytem (i.e. have the ame economic and technical feature), but they receive different tariff depending on the degreion rate. With the help of uer contraint, the increae in intalled capacity per model period i then retricted to the correponding maximum value for the repective degreion tep. In addition, one more PV proce i added which i not included in the FIT ytem. In thi way, an additional uer contraint can be put on the other PV procee participating in the tariff ytem (10 per type of olar PV ytem) in order to limit the total amount of capacity that i entitled to funding to 52 GW p. Thi modelling approach exhibit one light drawback. While in reality there i only one tariff level for all photovoltaic intallation, in the model in each time period the capacity limit for each proce would be exhauted conecutively according to their degreion rate. Thi iue can, howeve be rectified within the iterative proce of everal ucceive model run, which will be neceary anyway for the calculation of the FIT urcharge (cf. Chapter 3.3). In the firt model run, the different degreion tep will be taken into account reulting in invetment in new PV intallation at different degreion level (provided that photovoltaic ytem are competitive in the FIT ytem). In the econd model run, the highet degreion level that i reached in each model period will be applied to all olar PV procee.

21 3. Modelling of feed-in tariff in TIMES 17 Table 3-1: Flexible degreion rate for olar photovoltaic according to the German FIT law from 2012 (own illutration baed on BMU 2012a) Annual extenion Monthly degreion Annual degreion > 7500 MW p 2.8 % 28.9 % > 6500 MW p 2.5 % 26.2 % > 5500 MW p 2.2 % 23.4 % > 4500 MW p 1.8 % 19.6 % > 3500 MW p 1.4 % 15.6 % Extenion corridor: MW 1 % 11.4 % < 2500 MW p 0.75 % 8.6 % < 2000 MW p 0.5 % 5.8 % < 1500 MW p 0 % 0 % < 1000 MW p -0.5 % -6.2 % Tax incentive for olar PV rooftop intallation While it i certain that the ubtantial growth rate for olar photovoltaic can be mainly attributed to the high tariff level, other factor that might have influenced invetment hould be taken into conideration. In thi contex the cae of olar PV ytem i of particular interet a the typical invetor differ clearly when compared with the other renewable energy ource. It can be oberved that photovoltaic rooftop ytem in Germany are uually intalled by private houehold, farmer or mall buinee. Thee invetor benefit from a number of incentive which are generally not available to large-cale invetor. Firt of all, for the financing of photovoltaic intallation, oft loan, currently with interet rate between 1 % and 6 %, are available through the government-owned bank Kreditantalt für Wiederaufbau (cf. KfW 2012). In the model, thi i captured by applying a lower dicount rate of 5 % to PV rooftop ytem, a compared to 7 % for all other renewable electricity generation technologie. Moreove the German Income Tax Act (EStG, cf. Bundegeetzblatt 2009b) contain a number of pecial rule concerning the depreciation of photovoltaic intallation. Generally, olar PV ytem are written off on a traight-line bai over a period of 20 year. Private tax payer and mall buinee (with operating aet of up to ) then have the option to ue an invetment deduction (cf. 7g (1) EStG) allowing them to depreciate off the balance heet a maximum of 40 % of the planned acquiition cot. In addition, on the reidual value a pecial depreciation of in total 20 % in the year of the intallation and the following four year can be applied (cf. 7g (5) EStG). Hence, on the whole it i poible to depreciate up to 55 % of the invetment cot of a photovoltaic ytem in the year it i intalled. In order to be able to incorporate thee pecial depreciation rule in the modelling approach, the effect uch tax incentive might have on the invetment deciion need to be analyed.

22 18 3. Modelling of feed-in tariff in TIMES The benefit of an accelerated depreciation can be found in the tax deferral effec a taxable income in the firt year() i reduced at the price of a higher taxable income in future year. Due to the time value of money, thi reult in a poitive interet effect (cf. Otertag et al. 2000). For the cae at hand, thi can be illutrated by calculating and comparing the net preent value of future tax aving for the following two cae: (1) the olar PV intallation (aumed value of ) i depreciated on a traight-line bai only; (2) in addition to the traight-line bai depreciation, the invetment deduction of 40 % and the pecial depreciation of 20 % are applied in the firt year (to the ame olar PV intallation). In the firt cae, the net preent value of the annual depreciation amount add up to 32700, a compared to in the econd cae (calculated with a dicount rate of 5 %). Auming an average income tax rate of 25 %, the repective net preent value of future tax aving then amount to 8200 and Thu, in the preent example, making ue of pecial depreciation option can increae the net preent value of tax aving by 2400, i.e. almot 5 % of the aumed intallation price of Thi percentage hare increae lightly in the cae of a cheaper intallation price, and vice vera. Integrating uch fical incentive into an energy ytem model i fairly difficult a repercuion on the income ituation of houehold and other economic agent, which might influence their invetment deciion, cannot be taken into conideration. In the methodological approach at hand, the effect i approximated by auming a reduction in invetment cot for olar PV rooftop intallation by 5 % The demand ide: The FIT urcharge Given the fact that renewable electricity generation technologie are generally not yet competitive when compared to conventional technologie, feed-in tariff need to be ignificantly higher than current wholeale electricity price entailing additional cot in electricity generation and change in electricity price. A differentiation need to be made between the impact of FIT ytem on wholeale and on retail electricity price. A far a wholeale electricity price are concerned, it ha been oberved that promoting renewable electricity can have a dampening effect on the price level referred to a the meritorder effect (cf. Senfuß et al. 2008). Thi mechanim i illutrated in Figure 3-7. The wholeale electricity price i determined a the interection between the electricity demand and upply curve (alo called merit-order curve). Thi mean that the price i et by the (variable) generation cot of the marginal unit which i needed to cover demand. With increaed upport for renewable electricity, which exhibit low variable generation cot, the mot cotly part of the conventional generation i driven out of the market. Thi entail a movement of the merit-order curve to the right and a reduction in wholeale electricity price.

23 3. Modelling of feed-in tariff in TIMES 19 Price [ /MWh] P 0 P FIT = wholeale price without FIT = wholeale price with FIT Supply 0 Supply FIT P 0 P FIT Demand Figure 3-7: Extenion of renewable electricity due to the FIT Capacity [MW] Illutration of the merit-order effect of renewable electricity generation (own illutration baed on Teke and Schmidt 2008) A clearly different picture arie for retail electricity price. They can be expected to increae after the introduction of an FIT ytem, a grid operator are allowed to pa on the additional cot of the ytem to final electricity conumer via the FIT urcharge. Riing electricity price are likely to lead to adjutment reaction in the end-ue ector either in the form of a decline in demand for electricity ervice, the purchae of more efficient appliance or the ubtitution with alternative energy carrier (e.g. le heating with electricity, change in manufacturing procee). Thee effect need to be taken into account in the modelling approach by incorporating the FIT urcharge into the model. When uing the parameter NCAP_FSUB and FLO_SUB to model the feed-in tariff, the ource of funding lie outide of the ytem boundarie of the model. Hence, energy ytem cot are even reduced in comparion to a cenario without FIT cheme in place. The FIT urcharge can be calculated according to the equation on page 2 a the difference between the average FIT tariff and the average wholeale electricity price multiplied by the hare of FIT electricity in total electricity conumption. Once thi term i etablihed, it can be aigned to final electricity conumption in the model with the help of the parameter FLO_COST. Howeve at thi tage of the modelling approach, a number of problem arie. Firt of all, it i apparent that the variou component of the FIT urcharge depend themelve on the model reult. The aggregate um of tariff payment can be directly determined within the model by adding an additional output commodity to all FIT procee whoe output equal the total amount of FIT payment made for thi proce (modelled with the parameter FLO_FUNC, FLO_FUNCX and the ame SHAPE curve that have been ued for the tariff). There i, though, no linear relationhip between the total um of tariff payment and electrici-